Texas Real Estate State Practice Exam

What are the predominant characteristics of a lien theory state like Texas?

1. Lender holds title, borrower holds lien

2. Lender has lien, borrower has title

3. Borrower holds both title and lien

4. Lender holds both title and lien

The correct answer is: Lender has lien, borrower has title

In a lien theory state like Texas, the predominant characteristic is that the lender has a lien on the property, while the borrower retains title. This means that when a borrower takes out a mortgage, they are given the legal ownership—referred to as title—of the property. However, to secure the loan, the lender places a lien against the property. This lien serves as a legal claim that allows the lender to recover the loan amount in the event of default by the borrower. Thus, while the borrower has the rights associated with ownership—such as living in the home and selling it—the lender's lien ensures they have priority to be repaid from the sale proceeds before the borrower can realize any profit. This arrangement plays a critical role in real estate transactions and financing, distinguishing lien theory states from title theory states, where the lender holds the title until the mortgage is paid off. Understanding this dynamic is essential for navigating real estate transactions and formats in Texas, as it affects how properties are bought, sold, and financed within the state.